Bank of England holds interest rates

BoEThe Bank of England has held interest rates at 0.5 per cent, following the UK’s decision to leave the EU.

The MPC voted by a majority of 8-1 to maintain the rate, with one member, Gertjan Vlieghe, voting for a 25 basis point cut. The committee also made no moves on QE.

However, the committee said it will likely move on interest rates in August.

“Most members of the committee expect monetary policy to be loosened in August. The committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the committee’s updated forecast, and their composition will take account of any interactions with the financial system,” says a statement from the MPC.

Ahead of the rate decision markets were pricing in an 80 per cent chance of a rate cut, with many expecting the central bank’s QE programme to resume too. The last move to interest rates was in March 2009.

Sterling has risen two cents against the US dollar, to $1.336, following the surprise decision.

The committee warned that economic activity is likely to weaken in the near term.

In a statement it said: “Markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework have allowed the impact of the referendum result to be dampened rather than amplified.

“Official data on economic activity covering the period since the referendum are not yet available. However, there are preliminary signs that the result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence.

“Early indications from surveys and from contacts of the Bank’s agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions. Regarding the housing market, survey data point to a significant weakening in expected activity. Taken together, these indicators suggest economic activity is likely to weaken in the near term.”

In a speech last month, after the EU referendum, Carney says that the economic outlook for the UK had “deteriorated” following the vote. At the time, he said the bank would cut interest rates or restart QE this summer. He said a full assessment and new forecast will be published with the August inflation report.

Mike Bell, global market strategist at JP Morgan Asset Management, says: “Since the vote, UK consumer confidence, hiring intentions, business expectations and the construction outlook have all fallen. The declines in consumer and business confidence put the UK’s economic recovery at risk with growth likely to be meaningfully weaker than otherwise and with the risk of recession elevated.

“While the fall in sterling, combined with the rise in oil prices, will inevitably lead to a sharp increase in headline inflation over the coming year, the Bank of England will be more concerned by the downside risks to economic growth than the upside risk to inflation.”

However, experts think it is unlikely the Bank will cut rates below zero, with Bell saying the BoE will be “reluctant to take interest rates into negative territory” because of the impact it would have on banks.

Ahead of the rate cut Fidelity International fixed income manager Ian Spreadbury said it would be a mistake for the Bank of England to cut rates today.

“I think if Mark Carney does [cut rates], what are you achieving? Are you really achieving growth? I think there’s a bigger risk that they’re just exacerbating the rich-poor divide and just encouraging people to save more,” he said.